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The Department of Veterans Affairs (VA) provides healthcare to millions of veterans at VA's medical centers and healthcare facilities across the country. To support veterans, VA manages a Federal Supply Schedule (FSS) program and a national contract program. Both use VA's sizeable buying power to provide VA and other federal agencies discounts on medical products and services. To cover its costs in running the FSS program, VA charges its customers a user fee. Although sales through VA's FSS and national contracts totaled almost $7 billion in fiscal year 2003, concerns have been raised about the efficiency of these contract programs. GAO was asked to determine whether the FSS and national contracts have provided medical products at favorable prices and to identify opportunities to improve purchasing practices and increase savings. GAO was also asked to determine if VA's user fee is sufficient to cover program cost.

The more than 1,200 FSS and 330 national contracts that VA has awarded have resulted in more competitive prices and have yielded substantial savings. VA has achieved these favorable prices and savings, in part, by exercising its audit rights and access to contractor data to pursue best prices aggressively for medical supplies and services. For example, pre-award audits of vendors' contract proposals and post-award audits of vendors' contract actions resulted in savings of about $240 million during fiscal years 1999 to 2003. VA has also taken steps to further leverage its buying power on widely used healthcare items--such as pharmaceuticals and high-tech medical equipment--through its national contracts. According to VA, its national pharmaceutical contracts have led to a cost avoidance of $394 million in fiscal year 2003. However, VA has not taken the same aggressive approach to negotiate more competitive prices for healthcare services, such as radiology. In fiscal year 2003, healthcare services totaled about $1.7 billion, yet VA facilities only purchased about $66 million through VA FSS contracts. Instead, most medical healthcare services are purchased through contracts that individual VA medical centers have negotiated, a process that may not provide the most favorable prices. VA could also realize additional savings through improved medical center purchasing practices. Despite increases in medical centers' FSS purchases--which more than doubled between fiscal years 1999 and 2003--medical centers have not always taken advantage of the best prices available through VA's contracts. For example, in fiscal year 2001, a VA Inspector General (IG) report stated that VA medical centers frequently purchased healthcare products from local sources, instead of from available FSS contracts. Although VA has since implemented policies and procedures that generally require its medical centers to purchase medical products and services through VA's contract programs, a more recent VA IG report found that medical centers continued to make purchases from local suppliers. The VA IG estimated that, with improved procurement practices at medical centers, VA could save about $1.4 billion over 5 years. However, ensuring VA medical centers comply with VA's purchasing policies and procedures will be a challenge for VA, in part, because its monitoring of purchases lacks adequate rigor. The user fee that VA collects on FSS purchases--0.5 percent of sales--is expected to approximate the program costs. VA, however, does not have complete information on the costs to administer the FSS program. Without this cost data, VA is unable to know whether it is charging an appropriate user fee.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: According to VHA, the Prosthetics and Clinical Logistics Office has developed a data warehouse that now has procurement history data from Fiscal Year 2006 to the present. Data from the database is used to produce reports on procurement and populate to management tools developed jointly with DOD. According to a VHA representative, the reports and tools allow VHA to monitor medical surgical spend and switch to lower cost contracts for medical surgical items. VHA currently uses this data report to develop requirements for integrated product teams to enable new FSS contracts. The products purchased under FSS contracts are used as the basis for VHA National Prime Vendor medical supply contracts to allow for increased cost savings and efficiencies. The Anesthesia Recordkeeping System requirements that were established by the VHA's standardization workgroup were in the solicitation process as of September 2008. VHA's actions, as described by its response to GAO, show that VHA has explored opportunities to use its buying power to obtain more favorable prices for health care services.

Recommendation: The Secretary of the Department of Veterans Affairs should explore opportunities to use its buying power to obtain more favorable prices for healthcare services.

Agency Affected: Department of Veterans Affairs

Status: Closed - Implemented

Comments: VA IL 09-02 mandates procedures for ensuring extensive oversight for all procurement activities. Essentially, IL 09-02 requires comprehensive reviews at more than one-level of the procurement activity to ensure compliance with all Federal and VA acquisition policies. Moreover, the review process established by IL 09-02 ensures that the best prices are obtained whether using a FSS or National Contract. As such, oversight has been strengthened to ensure medical centers are using FSS or National Contract to obtain the best prices. Additionally, the Secretary of Veterans Affairs has approved the establishment of a separate center with responsibility of enterprise-wide and standardized procurement approaches by creating the Strategic Acquisition Center within the Office of Acquisition and Logistics (OAL). This realignment is expected to take 18-24 months, and will advance the goals of this recommendation by ensuring consistent application of efficiencies gained through contracting.

Recommendation: The Secretary of the Department of Veterans Affairs should strengthen oversight to ensure medical centers use FSS and national contracts to get the best prices available.

Agency Affected: Department of Veterans Affairs

Status: Closed - Implemented

Comments: The most recent review of the IFF fee was performed in September 2007. The results of the review are documented in minutes to the September 17, 2007 Supply Fund Board meeting. The review documented the need to raise IFF from 0.25% to 0.50%. The IFF increase was estimated to raise an additional $30 million and was used to fund the following initiatives: (1) Implement Center for Acquisition Innovation - $13M (2) Hire new Attorneys to support Contracting - $3.5M (3) 2 VHA CLO Initiatives - $2.4M (Logistics Data Analysis Team for SAM & Contract Support for Supply Line Functional Equivalency Project) (5) Dunn & Bradstreet VA Subscription - $600,000 (6) Offset Anticipated Operating Loss - $10M The Supply Fund Board voted to approve the IFF rate increase. VA's internal approval process for fee changes: 1)OAL Program Office documents the need to change fee and proposes new fee to the Deputy Assistant Secretary (DAS) for Acquisition and Logistics through the Supply Fund Chief Financial Officer. 2)If DAS for Acquisition and Logistics approves the proposal, it is presented to the Supply Find Board of Directors. 3)Supply Fund Board of Directors approves or disapproves, which is documented in the meeting minutes. 4)Board-approved fees are implemented, as approved.

Recommendation: The Secretary of the Department of Veterans Affairs should identify the complete cost of the FSS program and reassess its user fee to determine if it needs to be adjusted.